April 16, 2009

Multichannel Forensics: The Adjusted Index

The "Adjusted Index" helps the business leader who manages an "emerging channel", like Twitter for instance, to understand the future role an emerging channel is likely to play.

Here's the deal --- when customer counts are small, in relation to the dominant channel, it is very difficult for the emerging channel to do anything but appear to "feed" the dominant channel, while the dominant channel doesn't appear to do anything but stay in "isolation", hoarding customers from the emerging channel.

Time takes care of this problem. But we want to be able to see what role each channel might play in the future.

So give this a try. The formula was created from the composite of the majority of Multichannel Forensics projects I've worked on.


Existing Channel:

Step 1: Calculate "Indexed Customers" --- Existing Channel customers divided by Emerging Channel customers. In yesterday's example, this is 25,000 / 500 = 50.

Step 2: Record your repurchase index. In yesterday's example, the index for Online customers migrating to Twitter is 4%.

Step 3: Calculate "X", from the following formula: 1 / (2.55 * (Indexed Customers) + 2.36). In this case, "X" is equal to 0.0077.

Step 4: Calculate the "Adjusted Index": Adjusted Index = (Repurchase Index / X). In this case, the Adjusted Index = (0.04 / 0.0077) = 5.19. If this index is greater than 1.00, then it is likely that the Existing Channel is going to fuel the growth of the Emerging Channel. If the index is less than 1.00, then it is unlikely that the Existing Channel is going to fuel the growth of the Emerging Channel. In this example, the Online Channel is likely to fuel the growth of Twitter, with customers eventually leaving the Online Channel for Twitter. Your mileage may vary.


Emerging Channel:

Step 1: Calculate "Indexed Customers" --- Emerging Channel customers divided by Existing Channel customers. In yesterday's example, this is 500 / 25,000 = 0.02.

Step 2: Record your repurchase index. In yesterday's example, the index for Twitter customers migrating to the Online Channel is 80%.

Step 3: Calculate "X", from the following formula: 1 / (2.55 * (Indexed Customers) + 2.36). In this case, "X" is equal to 0.415.

Step 4: Calculate the "Adjusted Index": Adjusted Index = (Repurchase Index / X). In this case, the Adjusted Index = (0.80 / 0.415) = 1.93. If this index is greater than 1.00, then it is likely that the Emerging Channel is going to fuel the growth of the Existing Channel. If the index is less than 1.00, then it is unlikely that the Emerging Channel is going to fuel the growth of the Existing Channel. In this example, Twitter is likely to fuel the growth of the Online Channel, with customers eventually leaving Twitter for the Online Channel


In this example, Twitter and E-Commerce are likely to evolve toward a synergistic relationship, where customers willingly switch back and forth between each channel.

This methodology allows you to understand the trends that are likely to emerge in the future, and gives the proponents of emerging channels an opportunity to be excited about the future trajectory of the emerging channel.

And with the explosion of social media channels that appear to have almost no impact on sales, we need this index to help us understand what the long-term potential might be.

2 comments:

  1. Kevin, the Step 1 under Existing Channel and Emerging Channel both says the same method to calculate "Indexed Customers" i.e. Existing Channel customers divided by Emerging Channel customers. But in both the examples, the example you have given are inverse of each other.
    25,000/500 and 500/25,000.
    would you like to rethink on that?
    The rest of the post is quite understandable.

    ReplyDelete
  2. The words existing and emerging were switched, they are no longer, thanks.

    ReplyDelete